Economic advice. No longer special.

A hangover without a party pt1

One of my constant gripes with economic debate is how it gets reframed in moralistic terms. All parties tend to be guilty of this. For the Left, it was about some sin at the heart of capitalism, about the wicked behaviour of certain bosses and bankers. For the right, we all just consumed too much, worked too little, saved too little, lived high on the hog.

The latter view I call False Paradisism. Logically, it is a story that makes perfect sense, and in economic history dozens of examples can be found. An economy consumes too much, binges on goods and services it can’t easily afford, and builds up pressures of some kind or other that eventually come to bear, and end the party. These pressures, for the UK since the war, were usually either inflationary or across the foreign exchanges. Read any of those wonderful Wilson era memoirs (start with Jenkins, Healey, Benn, Crossland, and only then move on to the far duller Wilson); the very nature of political-economics for these people was the evasion or confrontation of the constraints of the Bretton Woods era and its inflationary aftermath, culminating in the final denouement in 1976 (read Burke and Cairncross, “Goodbye Great Britain”). The answer was usually to refocus away from consumption towards greater saving. The economic prescription wrote its own thundering moralistic editorial.

Many people see the run up to 2007 as the epitome of such a narrative. Didn’t we all go mad on credit card/mortgage debt, spending like there is no tomorrow, confident that some combination of financial wizardry/state largesse/ever rising economic prospects would rescue us?

It is hard to see in the figures (Chart updated for John Rentoul)

You can see what a real boom looks like: 1985-1989. That was going some. But as for the years running up to 2007, for many these were tough times.

Economics as morality will no doubt be a theme on this blog. Politicians need to translate economic advice: into terms they themselves can understand, and into terms they can present to the public as defensible for their actions. Moralistic language is one way of doing this. Choose your moral frame, and you can choose your policy. The policy suit for False Paradisism will come straight out of the cupboard of Tough Medicine: shape up, win the global race, be Competitive (i.e. keep those wages down). Invest in growthy things. Keep the pound low so foreign holidays are expensive and our manufactures sharply priced. Don’t cosset people on welfare. Don’t spoil yourself with nice sounding regulations that sap entrepreneurial vim. Above all, don’t kid yourself and everyone else that there is any kind of stimulus, any kind of easy way out. Look at our deficits, our uncomfortably high inflation, the way we Don’t Make Anything Any more.

It takes a lot to dispel such a convincing story, and it is clearly one that largely convinces the public; particularly, as with many great political stories it contains grains of truth within the general silage of misdirection. Consider this chart the first weak shot in a long campaign …

UPDATE: I should point out that @ChrisGiles_ observed this back in 2009: “For all the talk of shop-till-you-drop consumers bashing their credit cards, consumption this decade has fallen as a share of GDP by 1.3 points, with declines even during the supposed consumer boom years of 2006-07″. Get an FT subscription to read more.

For Nick Thornsby, I see he asks about wages. In a rush (so don’t put too much on this) I have rephrased Household Consumption (ABJQ) as a proportion of total household primary income (ROYR). It looks like nothing very unusual was going on in the mid 2000s, still. But I have a lot of data digging to do… in particular, there are distributional questions. It could easily be that many households who couldn’t afford it were consuming too much.

Yes – we know (don’t we?) that household debt was rising in the noughties. If it was rising faster than consumption then it seems the most likely explanation for the discrepancy is that households were borrowing to do the things they had already been doing but could no longer afford because of stagnant/falling wages. Otherwise, where is that borrowed money going?

Point taken. One foolish remark which nonetheless makes an issue of government overspending and does fit my assertion that the state printing too much money and thus artificially pushing up “private” spending is implicated.

[…] And it makes the important point that this has been going on for some time. We’re not living through the hangover after the party; for the majority, there was no party, as recovering Lib Dem economic advisor Giles Wilkes points out. […]